Rise in financial crime in NFT market calls for fresh investigation from regulators – Fin Tech

With the enduring popularity of some NFTs and the promise of their use in the metaverse and beyond, there are growing concerns around NFTs being the focus of traditional financial crimes such as money laundering and wire fraud, along with the hype around the new technology. For example, on June 30, 2022, the Justice Department indicted six individuals in four separate cryptocurrency fraud counts that totaled more than $130 million in investors’ funds. These indictments include charges of a global Ponzi scheme selling unregistered crypto securities, a fraudulent initial coin offering involving fake associations with top companies, a fraudulent investment fund that allegedly traded on cryptocurrency exchanges, and the largest known Contains non-fungible token (NFT) money. Laundering plan till date

In one of these cases, the defendant, Le Un Tuan, a 26-year-old Vietnamese national, was charged with conspiracy to commit wire fraud in California and one count of conspiracy to commit international money laundering involving the “Baller App” NFT. , ,US vs Tuan, No. 22-Cr-273 (Cd. Cal. Indictment June 28, 2022)). Seeking to capitalize on the popular Bored Ape Yacht Club, the defendants launched the Baller Ape Club, featuring “Baller Ape” NFTs, consisting of figures in various costumes decorated with colorful accessories. According to the indictment, Tuan and unidentified co-conspirators first gained access to investors’ digital wallets and processed token transactions and then “rugged” the alleged project without notice to investors shortly after the Baller App Club public sale began. and shut down their website. , In total, about $2.6 million was alleged to have been stolen. To hide the stolen funds, the defendants allegedly laundered funds through “chain-hopping”, a money-laundering scheme where funds are transferred across multiple cryptocurrency blockchains and theft using decentralized cryptocurrency swap services. Used to obscure the traces of money made.

US vs Tuan This is the most recent case of crime that has rocked the NFT world. Earlier in June, Nathaniel Chastain, a former Product Manager at OpenSea, was first charged in New York in a digital asset NFT “insider trading” scheme. ,US vs Chastain, No. 22-Crore-305 (SDNY Sealed Prosecution May 31, 2022)). OpenC is the largest online marketplace for buying and selling NFTs. Chastain reportedly launched a scheme by abusing his knowledge of confidential information to secretly purchase dozens of NFTs before appearing prominently on OpenSee. As part of the management team, Chastain was responsible for selecting the NFTs to be displayed on OpenC’s homepage; OpenSea kept these particular NFT selections confidential until they went live, as a main page listing often translated to price jumps. After the NFTs appear, Chastain will reportedly sell them at a profit of two to five times their initial purchase price. Running the purported plan from June 2021 to September 2021, some reports stated that Chastain made a total profit of 18.875 ETH, or $67,000 in September 2021 (not a large figure that news outlets reported at the time in August 2021). had reported sales volume of $4 billion). To conceal the fraud, he allegedly carried out these transactions using anonymous digital cryptocurrency wallets and OpenSea accounts. The DOJ brought charges against Chastain as one count of wire fraud and money laundering, seeking the forfeiture of any criminal proceeds, among other reliefs.1

Read |  RSNA launches Cervical Spine Fracture AI Challenge

These recent offenses related to NFTs raise several legal questions related to the status of NFTs. Chief among these concerns is the legal uncertainty as to whether existing securities laws apply to the new world of digital assets. (Note: The uncertainty surrounding NFTs and intellectual property protection is another matter, the subject of a related post.) Insider trading has traditionally been the basis of charges associated with securities transactions. However, NFTs are often considered digital collectibles and investment-quality digital artifacts as opposed to securities, and to date, there has been a notable lack of legal precedent around digital assets in general that may provide some clarity. Thus, it was unclear until Chastain’s indictment would also address Chastain’s alleged business dealings in September 2021. Despite the headlines and the label of “inside trading”, the Chastain indictment by the DOJ was not actually based on securities laws or insider trading. Trading rules, and indeed based on fraudulent claims as opposed to violations of securities law. Given the way the charges were drafted in the Chastain case—the word “security” doesn’t appear in the indictment—the indictment falls more under the general category of alleged financial crimes than violations of securities law. Indeed, as US Attorney for the Southern District of New York Damian Williams put it, “NFTs may be new, but this type of criminal scheme is not.” With new technology platforms and investment opportunities available, both money laundering and deceptive trading practices are age-old problems that will always emerge in the context of modern times.

Read |  Top technology trends revolutionizing the gaming industry

In the absence of clear guidance on the regulatory status of NFTs, a bipartisan group in Congress has attempted to provide clarity through a recently proposed Responsible Financial Innovation Act(RFIA), a comprehensive bipartisan law that seeks to create a complete regulatory framework governing digital assets. The RFIA seeks to clarify the respective jurisdictions of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over digital assets. If passed, the bill would provide greater regulatory clarity in determining whether a digital token is a commodity or a security, and by proposing, among other things, that most digital assets (subject to exceptions) be treated as commodities. will be classified. CFTC. As stated in a report on the bill to Congress: “The RFIA will reduce the SEC’s jurisdiction over digital assets as the agency currently envisions it.”

Despite the possible passage of the RFIA, it is important to note that the SEC has previously stated that NFTs can still be considered securities if they are ‘how shouldtest’, which determines whether an “investment contract” exists when money is invested in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. SEC vs. WJ Howe Company, 328 US 293 (1946). The SEC generally sees ‘how should Test with the nature of the transaction rather than the goods to be sold to determine whether an investment contract exists. Thus, even if some digital assets are treated as commodities under a new legal regime that has an expanded CFTC role, the SEC will likely still seek to regulate digital assets, which it believes. Whether it is being used to raise funds in the manner of traditional security or to be bundled and divided into securities on digital assets. Therefore, it makes us wonder how digital assets and NFTs can be regulated and how the role of the CFTC and SEC would be balanced under a comprehensive digital asset law. However, as Chair Gensler recently remarked about the RFIA bill, she is concerned that deregulating certain digital assets or removing them from the SEC’s jurisdiction could reduce or “weaken” the overall regulation of the market. Might be possible.

Read |  Best university opens its doors for Colombians to study science and technology careers

As the OpenSea and “Baller Ape” NFT indictments show, the decentralized nature and transparent ledger of blockchains can sometimes facilitate and even expose criminal activity. Taking advantage of these innate properties of blockchain technology while increasing responsible regulation from the SEC or CFTC can help promote a more robust, but secure crypto space. At the same time, however, increased regulation could also counter the sentiment of the crypto world, where many investors have been fixated on the lack of regulation in hopes of making their fortunes.

Foot Note

1. In the uncertain legal environment regarding digital asset regulation, multiple news sources have reported that this type of conduct may be more common than expected. Some traders, unlike Chastain, may be more careful and better at hiding their marks. Fedor Linnik, an NFT trader and creator, admitted that insider trading could happen in popular projects with 10,000 profile picture-style NFTs. Early buyers of newly created NFT collections cannot reveal unique properties or valuable rarities to their own NFTs, allowing a time lag for creators who know which unresolved NFTs are more rare and valuable. And it will be time to buy them in secret. market with the goal of reselling them at a higher price later. While some traders are taking advantage of the lack of regulation, many others may avoid certain projects for this reason and document potential crimes. This is exemplified by the fact that traders were the first to uncover Chastian’s alleged criminal activity by using blockchain records to link him to his publicly known Ethereum address. It is possible that if investigations from the crypto community or the government continue, more indictments will emerge in the future.

The rise of financial crime in the NFT market receives new scrutiny from regulators

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source link